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Mutual fund Strategy: Time to invest in accrual and short-term bond funds

The RBI in its bi-monthly policy review yesterday kept the repo rate unchanged at 6% and continued with the neutral stance.

The investors should stay away from long term bond funds and go for accrual funds and short term funds.

Here is what experts say :

Amit Tripathi, CIO – Fixed Income Investments, Reliance Mutual Fund

The tone in the policy was very balanced. The RBI is more focused on medium term drivers of growth and inflation, and wants to support the nascent recovery. The markets are pricing in many risks that RBI highlighted in its policy. Given RBI’s pragmatic approach and current market levels, one can expect some near term stability in bond yields, which have been very volatile of late.

The overall macro resilience of the economy remains high. However, we are clearly no longer in a rate easing cycle. Investors should prefer moderate duration portfolios with reasonable carry (accrual) for the bulk of their fixed income allocations.

R.Sivakumar, Head-Fixed Income, Axis Mutual Fund

We expect long bond yields to be range bound. However, the lack of a negative is not a positive, and even at current levels, we do not see value in long bonds given the duration risk involved.

Short rates have also sold off in recent months, with the 1-year certificate of deposit now yielding about 7.5% (compared to 6.5% in November). The entire short end of the curve (1-5 years) now appears to have “overpriced” the risk of tight liquidity and RBI policy stance. We see better value in this segment. Moreover, as the broad macro economy improves, we are also seeing improvement in corporate earnings, which is positive for corporate bonds – especially in the non-AAA space.

Investors with a medium term holding horizon should look to short and medium term funds, while those with a short-term holding period should consider liquid and ultra-short funds.

Pankaj Sharma, CIO- Fixed Income, DSP BlackRock Mutual Fund

In lines with market expectations, RBI has kept rates unchanged and maintained the neutral stance. The status quo on rates and a neutral stance indeed reflect a repeat of the balanced tone as witnessed in the December MPC. That said, we believe that macro variables have moved towards the negative territory over the past 2 months as factors like crude oil, yields in developed markets moving higher, fiscal slippage on the domestic front and prospects of change in MSP mechanism do not augur well for interest rates to head lower.

Hence, we maintain a bias for reversal in the interest rate stance sooner than later. Bond yields have been pricing the same and this policy for now will resist hardening of yields from current levels.

From a market perspective, the outcome of the policy is in line with market expectations and hence the immediate reaction is relatively muted.

Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund

The bond markets in India have been witnessing significant volatility lately. The 10-year G – sec yield has risen from the low of 6.37 percent in the month of Jan 2017 to 7.52 percent as of date.

By any count, this is a major bear grip on the market. The bond market has been wary on two counts — One is the rising CPI inflation and the second is the slipping fiscal deficit.

The market was slightly circumspect in light of fiscal slippage and was expecting a stern stance. In contrast, the RBI came with status quo accompanied by a milder stance. This came as a sign of relief for an excessively bearish market. We believe that the central banker’s policy stance would be increasingly data driven and were the crude prices to behave favourably; we may be in for a long pause.

We believe that markets globally and in India may witness intermittent bouts of volatility in the bond market. Investors thus can utilise tactical asset allocation strategies to benefit from rising opportunities in the debt market.

Relatively high accruing yields and limited NAV volatility make a strong case for investment in accrual/short-term fund segment. For those seeking to lock into current yield, levels could look at allocation to fixed maturity plans (FMPs).

Bottomline, the policy statement has put a lid on to the markets ultra bearish imaginations and going forward global and domestic data points would be watched for by policymakers as also market participants.

Kumaresh Ramakrishnan , CIO-Fixed Income, DHFL Pramerica Mutual Fund.

“We expected a very cautious tone in the policy document and not expecting a rate hike anytime soon. We had expected the policy document to refer to the slippage in fiscal numbers as stated in the budget announced on Feb 1”

He also says that investors looking to invest in fixed income can go for short term debt funds as they will have low volatility. Investors who are willing to take a bit of risk may go for accrual funds.

“Investors who are completely risk-averse or wish to take the minimum risk possible may go for Fixed Maturity Plans (FMPs),

Existing Investors in long term debt funds should revisit their portfolio and allocate a part of their corpus to short term debt funds.

Since a rate hike cannot be ruled in the coming months, investing in long-term debt funds doesn’t make sense anymore. A rising interest rate scenario is bad news for debt funds, especially long-term debt funds, because of the inverse relationship between yield and prices.

Dwijendra Srivastava, CIO-Debt at Sundaram Asset Management Company

10-year benchmark government securities (G-Sec) closed at 7.53%. “Given the current situation we foresee a rate hike in the next financial year. But the quantum of the rate hike and when it would be announced is difficult to predict at this point of time.” He also added that the 10 year yield will continue to remain in the range of 7.4% – 7.6% in the next few months.

Note : Past performance of fund does not guarantee the future returns.

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